What is the discount rate (i)? The discount rate is based on the idea that a dollar is worth less in the future than it is today, so the company can use it to adjust future profits and determine a customer’s value today for the customer’s purchases in the future. For example, if the discount rate is 10 percent, $100 in profits at the beginning of year 2 are worth only $90.91 [100/(1 + .1)]

at the beginning of year 1.To estimate CLV, firms use past behaviors to forecast future purchases, the gross margin from these purchases, and the costs associated with servicing the customers. Some costs associated with maintaining customer relationships include communicating with customers through advertising, personal selling, or other promotional vehicles to acquire their business initially and then retain them over time.

Measures of customer lifetime value typically apply to a group or segment of customers and use available secondary data. A basic formula for CLV, with the assumption that revenues and profits arrive at the start of the year, is as follows:

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CLV (profit at t x retention rate-1] acquisition (1+)-1 costs